Can More Upside Be Expected From Cabela’s?

The outdoor recreation sector in the U.S. grew approximately 5% annually between 2005 and 2011 despite the recession, when many sectors contracted. Outdoor recreation generates approximately $646 billion in consumer spending each year and 6.1 million direct jobs. Hence, it is not difficult to see why outdoor sporting goods retailers like Cabela's (NYSE: CAB) , Dick's Sporting Goods (NYSE: DKS) , and Big 5 Sporting Goods (NASDAQ: BGFV) have performed well.

Cabela's has been the best performer of the three with a stock price gain of close to 50%. If you think that you missed the bus, don't worry, because Cabela's can move higher in the future. The company posted strong results recently and the strategies that it is following are also impressive.

A look at the quarterCabela's had a strong third quarter if we exclude sales of guns and ammo, which were bad as expected. Despite weakness in guns and ammo, Cabela's managed to report comps growth of 3.9% which made it the eighth consecutive quarter of comps growth. Excluding firearms, comps increased by 5.3%. Driven by positive comps, consolidated revenue moved up 14.8% year-over-year to $850.8 million.

Cabela's good performance was also helped by its efficient inventory management. Inventory levels increased 13% year-over-year versus a revenue increase of 14.8% which means that Cabela's struck the correct balance between inventory levels and sales.

Also, earnings per share came in at $0.70. This was higher than last year's earnings of $0.60 per share. Cabela's expects 2014 to be the sixth consecutive year of double-digit earnings-per-share growth, signaling management's confidence about the company's prospects.

Strategies to watchCabela's next-generation stores have been outperforming legacy stores. Comps for next-generation stores were 280 basis points above consolidated comps. During the third quarter, 14 of the 18 next-generation stores operated during the entire period and they outperformed legacy stores by approximately 50% in sales per square foot and 60% in profit per square foot.

Hence, Cabela's next-generation stores are going to be an important growth driver going forward. The 14 new stores announced for 2014 represent approximately 18% retail square footage growth. In addition, a total of three new next-generation domestic stores have also been announced for 2015 so far. In addition, the Cabela's CLUB will be another growth driver in the future as its membership is growing. During the previous quarter, active members grew by 10.1% which means that it is increasing its customer base.

Not all is perfectHowever, Cabela's debt-equity ratio could be worrisome when compared to its peers. Currently, Cabela can service debt because it has a higher gross margin than its peers. However, a change in consumer spending behavior such as what happened with firearms in the previous quarter could change the dynamics very fast.

In comparison, Dick's stands out with zero debt. The company has been focused on growing by increasing store count, which stood at 540 stores in 45 states on Oct. 25. In addition, Dick's is also deploying technology to offer a better experience to consumers by serving them efficiently.

With its store development program -- including 40 new openings, four full remodels, and 75 apparel remodels -- for the current fiscal year already completed ahead of schedule, Dick's is in a good position ahead of the holiday season. Moreover, in order to expand its product offerings at various price points, Dick's recently entered into an agreement to serve as the exclusive eCommerce provider of licensed merchandise and sporting goods for ESPN's online fan shop.

All these initiatives and low debt make Dick's a stock to watch.

In comparison, Big 5 is also better off in terms of debt than Cabela's, although it's doing slightly worse than Dick's. Big 5's performance has not been very spectacular as comps grew 1.4% in the previous quarter over last year. On the back of positive comps, Big 5's revenue grew just 2.9% year-over-year to $259.1 million. In terms of store count, the company ended the third quarter with 420 stores in operation after having opened five and closed one.

Going forward, Big 5 plans to open eight new stores during the fourth quarter of 2013. In 2014, the company plans to roll out a new e-commerce platform which it expects to become a strong growth driver.

Bottom lineConsidering the overall package, Cabela's looks like a good pick. The company did well despite weakness in its firearms department, displaying the diversity of its business. Its new stores have started off well and the customer base is increasing.

Also, Cabela's is not too expensive at a forward P/E of 16 and analysts are expecting solid growth in the future. Cabela's earnings are projected to grow at a compound annual growth rate of 17% over the next five years, making it a good deal at current valuations.

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Are you kidding me? You compare Cabela's debt to Dick's an claim it is much higher, yet never mention the fact that Cabela's OWNS their own credit card, and all of the associated debt which goes along with it? The credit card business brings in about 14% of profit and has some of the most loyal customers in all of the credit card universe, yet this fact is left out of an article discussing the company.